Silver's more than a sparkle in investors' eyes
Analysts see price for 'undervalued' metal hitting $50 in next few years
By Myra P. Saefong, MarketWatch
Last update: 7:30 a.m. EDT June 6, 2008
SAN FRANCISCO (MarketWatch) -- Silver has been notorious for moving in tandem with gold, but silver prices have yet to trade anywhere near their record level.
Like gold, investors' appetite for silver has been a key catalyst for the increase in the metal's prices, according to CPM Group, a commodity research and consulting-services provider.
Gold futures climbed past $1,000 an ounce in March to mark their highest level. Around the same time, silver futures reached a high of around $21 an ounce -- four times higher than the price five years ago, but a far cry from the peak level around $50 in 1980.
"Silver remains the most undervalued of all the commodities and all the precious metals and at the very least, the $50 per ounce nominal high of 1980 is very likely to be reached in the next 2 to 3 years," said Mark O'Byrne, a director at Gold and Silver Investments Ltd.
We've all heard that price prediction before. Almost 3 years ago, experts said silver was ready to rally with demand for the commodity outpacing production for 15 years in a row. See archived story.
It's possible that the $50 prediction holds true now, more than ever.
"Silver prices didn't stay high for long in 1980, and already are showing far more sustainability this time around," CPM Group said in its Silver Yearbook 2008 report released in late April.
Compared to gold's secular bull market, "silver's bull market is lagging in development," said Peter Spina, chief investment analyst at SilverSeek.com. "It has caught up and now will outperform gold going forward."
"$50 silver is very much so a possibility as the U.S. dollar continues to deflate its purchasing power over the coming years," he said.
Changing ways
True, the $50 price has been widely attributed to an attempt by brothers Nelson and William Hunt to corner the silver market almost 30 years ago.
But the investment landscape for silver has radically changed.
"Investors' attitudes toward silver will be key in determining prices going forward," said Carlos Sanchez, associate director at CPM Group.
Investors are estimated to have purchased 126.2 million ounces on a net basis over the past two years, the group said. Prior to that, the market saw 15 years of consistent heavy net sales by "disenchanted investors" -- from 1990-2005, according to CPM Group.
In 2006, the iShares Silver Trust (SLV
ishares silver trust ishares
SLV) , a silver exchange-traded fund, was launched on the American Stock Exchange. During the course of that year, investors bought 121.1 million ounces of silver through that ETF, according to CPM.
"Supplies are rising but only incrementally and very marginally, especially in light of the huge demand created by the new ETFs and huge demand for physical silver internationally," said O'Byrne, who's based in Dublin.
World mine production of silver climbed by an estimated 4.1% to a record 533.7 million ounces last year, with the high silver prices encouraging new and expanded silver mine output, CPM Group said.
Secondary recovery of silver from scrap rose to 222 million ounces in 2007, up 3.3% from a year earlier, it said.
At the same time, fabrication demand rose by 0.9% to around 724 million ounces last year. It's expected to rise by 2.2% this year, CPM said.
Total ETF physical silver holdings climbed by 48% between December 2006 and December 2007, it said. They stood at 230.4 million ounces at the end of last year.
Silver ETFs alone now account for nearly half of the global silver market, according to O'Byrne.
With the Silver Trust having been the main silver ETF over the past couple of years, "all are startled by its power in the marketplace where to date, it has acquired 5,987 [metric tons] metric tons of silver," said Julian Phillips, an analyst at SilverForecaster.com.
That demand will, in time, "more than absorb 'official' selling by the governments that have been doing this over several decades," he said. "Currently we are left with only the remains of the Chinese and Indian governments."
"With this future and likely sudden drop in supplies from these sources, without any compensating drop in demand, we believe a day is coming when the silver price will soar -- even against the gold price where the supply factor will likely remain at close to present levels," Phillips said.
Add to that, if the Senate Banking Committee passes legislation to curb investment buying of oil and food, "then some of those funds will find their way to gold and silver," he said. See related story.
Dissipating supply
Silver is also used for industrial purposes on a huge scale -- akin to oil, said O'Byrne, and that means much of the above-ground supply of silver has been used up in the last 100 years.
Historical records suggest that about 43 billion ounces of silver have been mined since the dawn of civilization, according to CPM Group.
Maybe 1 billion ounces exist in the form of bullion bars and coins, and another 20 billion may be identifiable in jewelry, decorative objects and others, the group said.
But the "vast majority" of the world's mined silver cannot be accounted for, it said.
"It is estimated that 95% of the silver ever mined has been consumed by the global photography, technology, medical, defense and electronic industries," said O'Byrne. "This silver is gone forever."
And supply of silver is "inelastic," said O'Byrne. "Silver production will not ramp up significantly if the silver price goes up," he said, pointing out that supply didn't dramatically increase in the 1970s when silver rose 35-fold in price from $1.40 in 1971 to a high of nearly $50 in 1980.
At the same time, it's important to note that silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals, he said.
"Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production," he said. "In the event of a global deflationary slowdown, demand for base metals would likely fall, thus further decreasing the supply of silver."
There are only a handful of pure silver mines remaining, he said, so that inflexible supply means that the market cannot expect significant mine supply to depress the price after silver prices climb.
"It is extremely rare to find a good service, investment or commodity that is price inelastic in both supply and demand," O'Byrne said.
Making an argument
Still, for some, $50 remains a bit of a stretch.
Silver's "not likely to hit $50 -- perhaps something in the high $20s or low $30s," said Ned Schmidt, editor of the Value View Gold Report.
"Gold is a monetary asset as it is used as reserves by central banks and gold coins are minted that are legal tender in the nation that minted them," he said. But "silver was demonetized in the 1800s by act of Congress in the U.S."
"Silver had been treated as an 'option' on what gold's price does," he said. But now "we have so many alternatives to silver to distract investors -- ETFs, futures mini futures, options on future, options on the metals."
"Silver must now compete with all of these for investment money," Schmidt said.
SilverSeek.com's Spina would argue that silver is "still benefiting from the same monetary driving forces which are seeing growing inflows of fiat money in exchange for real money."
"Silver's historical monetary attributes will continue to attract further demand as gold moves higher," he said. "With gold becoming ever more expensive, silver's nearly 1/50th the price per ounce will grow its appeal."
Still, while $50 silver is not impossible, Jon Nadler, a senior analyst at Kitco Bullion Dealers said he doesn't expect to see silver prices reaching beyond $25-$30 "at the extreme" and even that would require some major spike in gold, to $1,200-$1,300, or a full collapse of the dollar.
Analysts see price for 'undervalued' metal hitting $50 in next few years
By Myra P. Saefong, MarketWatch
Last update: 7:30 a.m. EDT June 6, 2008
SAN FRANCISCO (MarketWatch) -- Silver has been notorious for moving in tandem with gold, but silver prices have yet to trade anywhere near their record level.
Like gold, investors' appetite for silver has been a key catalyst for the increase in the metal's prices, according to CPM Group, a commodity research and consulting-services provider.
Gold futures climbed past $1,000 an ounce in March to mark their highest level. Around the same time, silver futures reached a high of around $21 an ounce -- four times higher than the price five years ago, but a far cry from the peak level around $50 in 1980.
"Silver remains the most undervalued of all the commodities and all the precious metals and at the very least, the $50 per ounce nominal high of 1980 is very likely to be reached in the next 2 to 3 years," said Mark O'Byrne, a director at Gold and Silver Investments Ltd.
We've all heard that price prediction before. Almost 3 years ago, experts said silver was ready to rally with demand for the commodity outpacing production for 15 years in a row. See archived story.
It's possible that the $50 prediction holds true now, more than ever.
"Silver prices didn't stay high for long in 1980, and already are showing far more sustainability this time around," CPM Group said in its Silver Yearbook 2008 report released in late April.
Compared to gold's secular bull market, "silver's bull market is lagging in development," said Peter Spina, chief investment analyst at SilverSeek.com. "It has caught up and now will outperform gold going forward."
"$50 silver is very much so a possibility as the U.S. dollar continues to deflate its purchasing power over the coming years," he said.
Changing ways
True, the $50 price has been widely attributed to an attempt by brothers Nelson and William Hunt to corner the silver market almost 30 years ago.
But the investment landscape for silver has radically changed.
"Investors' attitudes toward silver will be key in determining prices going forward," said Carlos Sanchez, associate director at CPM Group.
Investors are estimated to have purchased 126.2 million ounces on a net basis over the past two years, the group said. Prior to that, the market saw 15 years of consistent heavy net sales by "disenchanted investors" -- from 1990-2005, according to CPM Group.
In 2006, the iShares Silver Trust (SLV
ishares silver trust ishares
SLV) , a silver exchange-traded fund, was launched on the American Stock Exchange. During the course of that year, investors bought 121.1 million ounces of silver through that ETF, according to CPM.
"Supplies are rising but only incrementally and very marginally, especially in light of the huge demand created by the new ETFs and huge demand for physical silver internationally," said O'Byrne, who's based in Dublin.
World mine production of silver climbed by an estimated 4.1% to a record 533.7 million ounces last year, with the high silver prices encouraging new and expanded silver mine output, CPM Group said.
Secondary recovery of silver from scrap rose to 222 million ounces in 2007, up 3.3% from a year earlier, it said.
At the same time, fabrication demand rose by 0.9% to around 724 million ounces last year. It's expected to rise by 2.2% this year, CPM said.
Total ETF physical silver holdings climbed by 48% between December 2006 and December 2007, it said. They stood at 230.4 million ounces at the end of last year.
Silver ETFs alone now account for nearly half of the global silver market, according to O'Byrne.
With the Silver Trust having been the main silver ETF over the past couple of years, "all are startled by its power in the marketplace where to date, it has acquired 5,987 [metric tons] metric tons of silver," said Julian Phillips, an analyst at SilverForecaster.com.
That demand will, in time, "more than absorb 'official' selling by the governments that have been doing this over several decades," he said. "Currently we are left with only the remains of the Chinese and Indian governments."
"With this future and likely sudden drop in supplies from these sources, without any compensating drop in demand, we believe a day is coming when the silver price will soar -- even against the gold price where the supply factor will likely remain at close to present levels," Phillips said.
Add to that, if the Senate Banking Committee passes legislation to curb investment buying of oil and food, "then some of those funds will find their way to gold and silver," he said. See related story.
Dissipating supply
Silver is also used for industrial purposes on a huge scale -- akin to oil, said O'Byrne, and that means much of the above-ground supply of silver has been used up in the last 100 years.
Historical records suggest that about 43 billion ounces of silver have been mined since the dawn of civilization, according to CPM Group.
Maybe 1 billion ounces exist in the form of bullion bars and coins, and another 20 billion may be identifiable in jewelry, decorative objects and others, the group said.
But the "vast majority" of the world's mined silver cannot be accounted for, it said.
"It is estimated that 95% of the silver ever mined has been consumed by the global photography, technology, medical, defense and electronic industries," said O'Byrne. "This silver is gone forever."
And supply of silver is "inelastic," said O'Byrne. "Silver production will not ramp up significantly if the silver price goes up," he said, pointing out that supply didn't dramatically increase in the 1970s when silver rose 35-fold in price from $1.40 in 1971 to a high of nearly $50 in 1980.
At the same time, it's important to note that silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals, he said.
"Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production," he said. "In the event of a global deflationary slowdown, demand for base metals would likely fall, thus further decreasing the supply of silver."
There are only a handful of pure silver mines remaining, he said, so that inflexible supply means that the market cannot expect significant mine supply to depress the price after silver prices climb.
"It is extremely rare to find a good service, investment or commodity that is price inelastic in both supply and demand," O'Byrne said.
Making an argument
Still, for some, $50 remains a bit of a stretch.
Silver's "not likely to hit $50 -- perhaps something in the high $20s or low $30s," said Ned Schmidt, editor of the Value View Gold Report.
"Gold is a monetary asset as it is used as reserves by central banks and gold coins are minted that are legal tender in the nation that minted them," he said. But "silver was demonetized in the 1800s by act of Congress in the U.S."
"Silver had been treated as an 'option' on what gold's price does," he said. But now "we have so many alternatives to silver to distract investors -- ETFs, futures mini futures, options on future, options on the metals."
"Silver must now compete with all of these for investment money," Schmidt said.
SilverSeek.com's Spina would argue that silver is "still benefiting from the same monetary driving forces which are seeing growing inflows of fiat money in exchange for real money."
"Silver's historical monetary attributes will continue to attract further demand as gold moves higher," he said. "With gold becoming ever more expensive, silver's nearly 1/50th the price per ounce will grow its appeal."
Still, while $50 silver is not impossible, Jon Nadler, a senior analyst at Kitco Bullion Dealers said he doesn't expect to see silver prices reaching beyond $25-$30 "at the extreme" and even that would require some major spike in gold, to $1,200-$1,300, or a full collapse of the dollar.
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